Chinese economy: Will the "bazooka" stimulus work?

Night on Beijing Central Business district buildings skyline, China cityscape

(Image credit: ispyfriend)

published 21 October 2024

Excitement over a Chinese stimulus “bazooka” is starting to wane, say Wataru Suzuki and Stella Yifan Xie for Nikkei Asia. Beijing has unveiled a series of stimulus measures designed to reinvigorate the world’s second biggest economy, sending the local CSI 300 index soaring by more than a fifth. Markets have been pinning their hopes on a rumoured ¥1 trillion-¥3 trillion (£107 billion-£322 billion) in “fresh fiscal spending”, but details are lacking.

Finance minister Lan Fo’an merely said there is “relatively large room” for new state borrowing. Fo'an plans to use it to help cash-strapped local governments and to stabilise the property market, says Keith Bradsher in The New York Times. Investors want numbers, but for that, they must wait until later this month, when the standing committee of the national legislature is expected to “sign off” on new debt issuance.

How are investors reacting to the Bazooka stimulus?

Markets are hoping for a bazooka stimulus to rival China’s massive response to the 2008 global financial crisis, says Mohamed El-Erian on Bloomberg. They are likely to be “disappointed”. Not for the first time, foreign money managers are “grossly” oversimplifying the Chinese economy. Officials have always shown a preference for “limited stimulus”. They are well aware that a huge fiscal bazooka would only exacerbate the “serious imbalances” and debt that caused this slowdown in the first place. China wants an “insurance policy” against a serious economic crunch, not a bazooka that will fire up another unsustainable boom.

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The stock market rally is part of a strategy designed to raise economic confidence, says Ambrose Evans-Pritchard in The Telegraph. These state-sanctioned “boomlets” usually run for two months before regulators step in to cool things down. That said, with global interest rates falling, the current rally may have a little more “staying power”. Stocks “could have a pop for a while, but the risk is what we saw coming out of Covid”, says Bill Bishop of the China Sinocism newsletter. “There was quite a rally for a couple of months but then people realised that the economic policies hadn’t changed.” On 11 times forward earnings, Chinese shares are temptingly undervalued, says Chan Ka Sing for Breakingviews.

The equivalent rating for Indian shares is 20. But the Shanghai market trades heavily on sentiment – much of this rally “has been fuelled by fast money betting” on the latest government announcements. “Chinese stocks have become more of a trade than a long-term investment.” The market’s long-term record is disappointing, agrees Buttonwood in The Economist. Over the past 15 years, Chinese GDP has “quadrupled” in nominal terms, yet the CSI 300 is up “less than a quarter” over the same period. Should long-term “buy and hold” investors pile in? “The answer is clearly still ‘no’.”

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.